Risk and the Welfare State: A Response to Jacob Hacker

Economic insecurity exists and is growing, but we should not exaggerate it, we should not ignore its uneven incidence, and we should not understate the difficulties involved in organizing a political response to it.

I.

First, consider the table below. Worker A makes $50,000 a year. Worker B makes $50,000 a year, except in Year 3, in which she makes $100,000 a year. According to Hacker, we should consider Worker B worse off because she has a more volatile income history. But the truth seems the opposite: Worker B simply had a windfall in Year 3. The additional income in Year 3 is a potential problem if Worker B was under the impression that the doubling of her income was permanent; in that case she might be psychologically but not materially worse off in Year 4 than Worker A. But this is a problem of a different order than suggested by Hacker.

Worker A

Worker B

Year 1

$50,000

$50,000

Year 2

$50,000

$50,000

Year 3

$50,000

$100,000

Year 4

$50,000

$50,000

Year 5

$50,000

$50,000

A true measure of risk in the economy should exclude such one-time income windfalls. There is reason to think that economic trends have led to systematic increases in windfalls in recent decades. First, greater participation of women in the labor force has led to the possibility that a second spouse works only during particular years and withdraws during other years, creating income volatility. Second, the historically unprecedented rise in stock valuations in the last three decades may have led stock-holders to realize capital gains that show up as one-time gains in income.

Hacker discusses more than income, of course: he also shows that the number of bankruptcies is increasing and that families are losing their homes. However, seen in historical and comparative context, each of these trends becomes more complicated than it seems at first.

Consider bankruptcy. Hacker writes that bankruptcies have quadrupled since 1980 but does not mention the lively debate among scholars as to the causes of this expansion. Part of the explanation may be the increasingly precarious economic positions of households, as well as bankruptcies caused by medical issues.1 However, scholars are more likely to attribute the increase in bankruptcies to credit market deregulation (which led banks to extend credit to riskier populations) and the decline in the “costs” of defaulting and the stigma of bankruptcy.2From a comparative perspective, it is not difficult to explain why bankruptcy is more common in the U.S. than other developed countries: no nation has historically been as debtor-friendly as the U.S., with its liberal bankruptcy laws dating from the nineteenth century. In France, the concept of consumer bankruptcy did not exist until 1989, and in other countries bankruptcy legislation has only recently moved toward the American model.3 Even after the 2005 bankruptcy reform, the complete discharge of debts that is available to Americans is rare in other countries,4 making bankruptcy a more attractive option in the U.S. than elsewhere.

The story for home foreclosures is similar. The number of foreclosures has risen, but the increase is due in part to banks granting loans to households that, in earlier generations, would have been considered too risky. It is not clear that the solution is to remove such households’ access to credit, as some urge.5

These observations suggest that the rise in “risk” observed by Hacker and others is actually two distinct phenomena: a rise in opportunities to take more risks because of legislative changes and increased prosperity over the last three decades, and a rise in the need to take more risks because of the deterioration of the social safety net and the decrease in the number of full-time jobs with job security and benefits.

Moreover, these different types of risks are not likely to be distributed evenly. Which income groups are more likely to have income volatility caused by one-time sales of stocks? For which income groups is one spouse’s withdrawal from the labor market likely to be voluntary and for which income groups is it more likely to be involuntary? Who is more likely to take advantage of the homestead exemptions in bankruptcy laws that allow homeowners to shelter a portion of their assets? And who is more likely to be able to bounce back from bankruptcy?

A more careful assessment of the causes of income volatility will lead, we predict, to the conclusion that “risk” is being experienced differently at different points on the economic spectrum, and that the recent focus on the fragility of the middle class is eliding a crucial distinction: the divergent consequences of neo-liberalism for different classes. For example, while the poverty rate has held steady since the 1970s, the rate of those in extreme poverty (with incomes below 50% of the poverty line) jumped dramatically in the early 1980s and has never returned to 1970s levels.6 Those in extreme poverty are not very extensively studied, so the causes of the increase remain unclear. For recent years, the increase seems to have resulted in part because poor families either left or were forced out of income support programs.7 In short, middle-class families may be facing increasing risks, but poor families have already lost the bet.

II.

Hacker’s point is to demonstrate the need for a cross-class progressive coalition founded on insuring against risk, emulating the cross-class coalitions that built European welfare states. But such a coalition may be neither feasible nor desirable.

First, consider the evidence that the experience of risk leads not to collective consciousness, but to ideologies of individualism. Sociologists of the workplace remind us that work practices can shape consciousness, and recent research suggests that the experience of risk increases the appetite for risk. Vicki Smith’s ethnographic investigation of four workplaces finds that increased insecurity operates as a “fracturing force” that “minimize[s] the probability that workers will identify with other workers in ways that might lead to meaningful challenges or alternatives.”8 For example, Smith found that temporary workers’ “desire for a ‘real’ job led them to engage in strict self discipline” and to find empowerment in the idea that through their efforts, and against the odds, they might gain work as real employees.9 Smith argues that the rise of the contingent work force and a go-it-alone workplace model for promotion and upward mobility promotes individualistic experiences of work and understandings for the prospects for change. Workers respond to risk by embracing individualistic ideologies and practices in order to survive. Similarly, Sandra Barnes finds that the strength and tenacity required to “make the daily round” lead poor residents of Gary, Indiana, to espouse individualistic ideologies as a coping mechanism.10 As with the workers in Smith’s study, risk was embraced individually at the expense of any sort of collective vision or organization. The very insecurity that Hacker discusses is responsible for eroding popular opposition to risk.

Second, the European model of universal welfare states founded on cross-class coalitions may not be a model worth following. Universal welfare states primarily benefit the middle class and the wealthy.11 For example, state subsidized universal college education is paid for by all taxpayers, but it directly benefits only those who go to college. Those who go to college are more likely to come from the middle and upper classes than the taxpayers paying for their education, so universal college education leads to the less fortunate subsidizing the more fortunate through taxation.

Similarly, universal insurance, the only universal proposal among Hacker’s basket of proposals, would reinforce income differences between classes: relatively rich workers would be able to maintain their higher standard of living at the expense of taxpayers with lower but more stable incomes. Hacker stresses the positive consequences of such security but ignores the reverse-redistributive aspect of universal proposals.

Moreover, it has become increasingly apparent that the European welfare states are financed by regressive taxes on consumption and labor of the kind that Hacker does not want.12 The clear benefits of the European model, including lower poverty rates that are made possible because the poor benefit from the universal welfare state along with everyone else, come at clear costs: not only the well-known problem of increased unemployment, but also increased prices (and therefore decreased standard of living) for all consumers, including the poor, caused by the sales taxes that fund the welfare state. Comparative and historical research suggests that a progressive tax system may not be capable of generating the high levels of revenue necessary to maintain a welfare state oriented toward universal policies.

The American welfare state has many problems, but the story of American political economy is not finished yet. We suspect that the presidency of George W. Bush has radicalized an entire generation, and that we will soon witness another of the periodic reform eras that punctuate American history. One of the essential debates for this new reform era will be whether the costs of a universal model of welfare are worth its undeniable benefits, or whether the U.S. should continue to follow its traditional focus on the poor. Experiments at the state level with health legislation suggest that an “American way of health care” that focuses on the worst off is in the making and will concentrate on a combination of catastrophic coverage, health insurance for poor children, and state mandates for basic health insurance as in Massachusetts. Because health care is tied to economic capability, the combination of these measures may yet achieve an American model of poverty reduction. And although we have our disagreements with his analysis, we nevertheless find ourselves reassured that Jacob Hacker will be in the forefront of the debates that will forge the next great era of American reform.